Tuesday, March 20, 2012

An Economic Collapse Is Unavoidable

We are living through the death throes of an empire. For those citizens who understand what is occurring, the process is akin to being trapped in a taxicab where the meter is on and running at an infinite pace. We cannot get out; nor will we be able to pay when the bill is submitted.

Government Duplicity

The duplicity and outright lies of government are becoming more apparent. There are too many to list here. Here are a few:Favorable forecasts regarding the economy are cruel jokes to everyone, but especially to those unemployed and underemployed. The country is told that the economy is out of the woods and on its way, recovering from the worst recession since the 1930s. No one with an IQ higher than room temperature or the ability to see should believe that.The Obama Administration stumbled badly with their first major promise. We were told that if the stimulus package was passed, unemployment would not exceed 7%. It was passed and unemployment soared over 10%. The package had no promised shovel-ready jobs and turned out to be the biggest pork bill ever. Virtually nothing went to Main Street to help individuals. Unions, government employees and other
Democrat constituents were the primary beneficiaries along with the banking industry. President Reagan, like President Obama, inherited a difficult situation when he entered office. To the right is a comparison of what happened under Reagan and under Obama. The chart compares unemployment rates. Changes in the manner in which unemployment is currently measured favorably distort the unmitigated disaster that is Obama’s economic policy. Adjusting data to the same basis, would make the comparison even worse.To issue such an unemployment forecast, the Obama Administration had to be either desperate, economically illiterate, lying or just stupid. Feel free to pick from multiple categories is making your judgment. If that one forecast were all that was involved, there would be little need to harp. Yet every subsequent pronouncement or projection has similarly been wrong, often in similar magnitude. I have not checked all the statements, projections and claims, but I do not recall a single major economic promise or projection being correct. Many have resulted in additional outright lies to cover the impotency of this administration.The projections of Federal Reserve Chairman Ben Bernanke are no better. He is the only one who might be able to compete with Administration economists for worst forecaster of all time. Again, without checking every major item, I think he is batting 1,000 in terms of incorrect projections. YouTube and other websites provide ample evidence, mocking his dismal forecasting record.

Despite record stimulus, both fiscal and monetary, the economy has not improved. The declaration of the end of the recession was reminiscent of George W. Bush’s premature claims of victory in Iraq but was a necessary part of of the pretend and extend game that government must play. There is no escape from an economic apocalypse, hence much of the duplicity.

An Economic Collapse Is Unavoidable

It would not be too late to avoid this collapse if this were a corporation operating in a free market. In that case, a hard-nosed, savvy turnaround specialist could come in and save the company by slashing spending mercilessly. But we are dealing with a political entity run by political animals who are neither very smart nor very brave. In such a situation and especially today where leadership is absent in either political party, there will be no solution. Competing interests and entitlements are too entrenched. Politicians behave only to get re-elected and no one has ever run for office successfully by promising to cut programs. Imagine the slogan: “Vote for me and this is a list of things I will take away from you.” Thus, it is impossible to avoid the coming disaster.

The economy continues to worsen because we have squandered and continue to squander valuable resources in an attempt to avoid doing the right things. The political class has chosen to protect their positions by pretending that matters are getting better. The economic system is now so burdened with debt, price distortions and asset mis-allocations that we are on the verge of an economic collapse. When this happens or what of the many incidents that might trigger it is anyone’s guess.

The best efforts of both government and their media cronies are devoted to covering up what is truly happening in the country. Statistics are likely being manipulated. Even so, they are so bad that the Administration and the media must sugar-coat them. As matters deteriorate, official claims only appear more incredible. The Kool-Aid drinking dullards may be kept in the dark and in the fold by such techniques, but independent thinkers are not.

For the rest of us, the internet provides real analysis. ”Agenda analysis” is obviously practiced on the internet, but there is no pretense of objectivity. The major pundits and analysts do not try to hide their political biases. The internet is not monolithic. Diversity and economic skills exist. The same cannot be said of the mainstream media. Much of the economic analysis on the internet is first-rate, certainly surpassing the mainstream media and, in many instances, the economics profession itself. One of the reasons for the weaknesses in the professional economics class is that many have been “bought” via government subsidies and grants. Even newly minted economists are corrupted through the tenure process administered by their academic whore superiors.

The funded debt of the US government has now reached $15.3 Trillion or 100% of GDP. This ratio is already worse than some of the sick European countries and it is deteriorating at a rate of $100 billion plus per month. Spending is completely out of control and President Obama will soon request another raise in the debt ceiling.

Funded debt is only part of the story. Not included in US debt is another $7 Trillion of Federal guarantees for the debt of FHA, Fannie and Freddie. The latter two continue to hemorrhage as mortgages continue to default. Also not included are the promises associated with Medicare and Social Security. These programs alone, as they currently exist, represent a $100 Trillion liability. The total net worth of the entire country is less than $60 Trillion! Confiscation of every private asset would still leave these programs insolvent and the country penniless.

The magnitude of the debt is overwhelming and impossible to grasp. Suddenly a billion dollars or another $100 billion mean nothing.

There is so much happening so rapidly that the average American has no idea of the state of the country. Few understand that the situation is hopeless, regardless of what government does. Defaults, both private and sovereigns are coming. The laws of mathematics say there is no solution.

Nothing is going right! Virtually every metric or important trend is disappointing and becoming worse. Financial Armageddon provided some recent news headlines which showed the deterioration:“Freddie Mac Has Wider Loss, Seeks $6 Billion From Treasury” (Bloomberg)“FHA May Need U.S. Taxpayer Aid to Bolster Reserves as Net Worth Nears Zero” (Bloomberg)“Fannie Mae Asks Taxpayers for Another Bailout” (Christian Science Monitor)“Post Office Near Default? Losses Mount to $5.1B” (Associated Press)“U.S. Boosts Estimate of Auto Bailout Losses to $23.6B” (Detroit News)“U.S. Pension Insurer’s Deficit Hits Record $26 Billion” (Los Angeles Times)“Taxpayer Costs Balloon to $8 Billion under Farm Insurance Program” (Environmental Working Group)The US government is like the little Dutch boy with the leak in the dike. Unfortunately for government (and us), this is not a fairy tale that will end well. There are more financial and economic leaks than the government has fingers. Each unplugged leak, originally a trickle, is now a stream on its way to becoming a torrent. Eventually a flood will wash the economy away. Reality, unlike fairy tales, often does not end happily. In this instance it well end tragically.

In light of all of this, President Obama wants to continue to spend more money. Every week he has some new initiative. Most proposals are as ridiculous as his $400 t0 $500 billion gimmickry for another “jobs program.” 40 people randomly selected from the population at large could do a better jobs program than the current Washington clowns. Obama’s proposal was never a serious one, merely a political ploy intended to provide something to run on in what appears to be an increasingly desperate re-election campaign. Even if funds were provided, jobs cannot be created by government spending.

More spending is not the answer to our problems. This spending has to be financed with more government debt, which only worsens the problem and hastens our demise. We currently spend almost 50% more than we collect in revenues. Soon funding from capital markets will no longer support government’s debt needs (much of which is already being financed sub rosa by the Federal Reserve via money creation). Once that happens, we have two choices:Cut current spending back to levels that are in line with revenues (about a $1.4 Trillion spending cut per year).End the pretense and go full speed ahead with money creation which eventually will lead to very high (perhaps hyper) inflation.

A proper combination of both would also work, although a reduced level of deficits would still continue adding to government debt. If cuts were meaningful enough, at least $500 billion per year with proper modifications in current social security and medicare, it might be possible to slowly “grow” our way out of this mess. The chances of this happening before a financial Armageddon are slim. Such a course is still doable. $500 billion cuts are pocket change. Adjustments to the social programs can be made whereby no one retired or near retirement need be affected.

The insincerity and cowardice of government, at least this administration and the current Congress, was shown with the formation of the “Super Committee.” This committee was established to come up with spending cuts and revenue increases, targeted at $1 Trillion over ten years. Never mind that the Simpson-Bowles committee had already plowed this ground and recommended $4 Trillion in cuts. The latter effort was merely political chicanery to buy more time for the political class. It never was designed to produce a viable solution.

Europe is merely a precursor to our situation and thus far they have barely begun their descent into Hell. Kicking the can down the road is almost over. We are out of road.